Banking and Finance

After Mistrial, Feds Will Retry Cay Clubs Founder In November

 Authorities are hoping that Fred Davis Clark's good luck streak has finally run out.  The founder of Cay Clubs, which has been accused by civil and criminal authorities of operating a massive $300 million Ponzi scheme that duped scores of investors with promises of lucrative returns through timeshare leasing, is set to stand trial in early November after a previous federal jury deadlocked and a mistrial was declared.  This followed the May 2014 dismissal of a suit brought by the Securities and Exchange Commission after a federal judge found that the applicable statute of limitations had expired.  Federal prosecutors unveiled a 12-count superseding indictment on October 2, 2015, with the focus of the charges shifting from Clark's alleged operation of a massive Ponzi scheme to his role in allegedly orchestrating numerous sales to and from "straw buyers" designed to artificially inflate the prices of condominium units to be later sold as timeshares.  If convicted of all charges, Clark could face dozens of years in federal prison.

The Scheme

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Dave Clark served as Cay Clubs' chief executive officer, while his wife Cristal Clark served as a managing member and the company's registered agent.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxury resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company was alleged to have lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs allegedly used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  While the Securities and Exchange Commission initiated a civil enforcement action in January 2013 alleging that the company was nothing more than a giant Ponzi scheme, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Just weeks after the dismissal of the Commission's action, authorities unveiled criminal charges against Dave and Cristal Clark and coordinated their arrest and extradition from Honduras and Panama where they had been living.  The charges stemmed from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Authorities alleged that the pair used a series of bank accounts and shell companies previously used with Cay Clubs to steal funds from the pawn shops to sustain their lavish lifestyles abroad.  Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

After a five-week trial earlier this summer, a federal jury deliberated for four days before acquitting Cristal Clark of all charges and deadlocking on the charges against Dave Clark.  

Superseding Indictment

In the previous indictment, prosecutors painted a wide-ranging conspiracy that was centered on the Clarks' alleged operation of a Ponzi scheme through Cay Clubs.  This conspiracy was described in that indictment as:

As the indictment later explained, the scheme involved a process in which the Clarks and other insiders would artificially inflate the prices of the timeshare units by "flipping" them in insider transactions to investors.  The original indictment focused on the misrepresentations made to those investors as well as the big-picture allegations surrounding the operation of Cay Clubs as a massive fraud..

Following the mistrial, prosecutors seem to have tweaked their strategy by honing in on the insider transactions that were used to artificially inflate the unit prices and allegedly defraud the lending institutions.  This shift in focus is evident in the superseding indictment's revised "Purpose of the Conspiracy" below:

In ensuing allegations, the indictment alleged that Clark would identify certain family members to act as "straw borrowers for loans that were used to purchase Cay Clubs units."  These straw borrowers would prepare fraudulent loan applications, which included representations about the borrower's employment and income, designed to induce lenders to approve the extension of credit.  Clark and others also allegedly prepared fraudulent HUD-1 Statements in which they certified that the borrowers had made the required down payment and cash-to-close payments when, in reality, those payments were made by a Cay Clubs entity controlled by Dave Clark.  

As a result of the fraudulent representations, the mortgage lender would subsequently issue funds that ultimately were placed into Cay Clubs accounts controlled by Clark and used to perpetuate the fraud.  While Clark would make the initial few mortgage payments on behalf of the straw borrowers, he subsequently stopped making the payments and caused the mortgages to go into foreclosure - resulting in substantial losses for the lenders.  

In addition to the seven counts focusing on the "straw borrowers," the indictment also includes four counts related to Clark's position as principal of a Caribbean pawn shop business and the alleged misappropriation of millions of dollars from that company for his own personal use.  A final count centers around allegedly false statements made by Clark to the Securities and Exchange Commission concerning his assets.  

Retrial

Dave Clark's trial is scheduled to begin on November 9th, and will likely take several weeks.  

The upcoming trial will likely feature testimony by former Cay Clubs sales executive and lawyers who have been cooperating with the government.  This includes former sales agents Ricky Lynn Stokes and Barry Graham, who each received a five-year prison sentence after entering into plea agreements with prosecutors.  Additionally, former Cay Clubs attorneys Scott Callahan and Charles Phoenix previously entered into immunity agreements in which they admitted to concealing information about Cay Clubs from lenders and agreed to provide assistance and testimony. 

While Cristal Clark was freed following her acquittal, Dave Clark has remained in jail after the court rejected an attempt by his lawyers to release him on bail pending trial.  

Previous Ponzitracker coverage of Cay Clubs is here.

Superseding Indictment

 For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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